DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and the Brent contract on the Intercontinental Exchange moved mixed in early trade Friday, with all petroleum contracts heading for weekly losses as investors reprice the risk of a deeper recession next year amid increasingly hawkish central banks.

International crude benchmark Brent contract fell below $90 barrel (bbl) for the first time in six weeks and West Texas Intermediate is trading at the lowest level since September after European Central Bank President Christine Lagarde said recession alone might not be enough to bring down consumer prices.

"Interest rates remain the most effective tool for shaping our policy stance. We expect to raise them further to the levels needed to ensure that inflation returns to our 2% medium-term target in a timely manner," Lagarde furthered.

Markets broadly expect the ECB will increase its key interest rate by 0.5% next month to 2% after lifting the benchmark rate by 0.75% at its two previous meetings.

In the United States, St. Louis Federal Reserve President James Bullard sent shockwaves through markets on Thursday after he suggested the federal funds rate might go as high as 7% to tame inflation. The Federal Reserve is currently targeting the key overnight borrowing rate between 3.75% and 4%.

"Monetary tightening so far has had a limited effect on prices. Based on this analysis, rates must stand at the minimum of 5% and 5.25%. That would at least get us in the (restrictive) zone," said Bullard.

In September, central bank officials projected the federal funds rate rising to around 4.6% in 2023, with the projection almost certainly to be updated at the next Federal Open Market Committee meeting on Dec. 13-14. Current market consensus sees a 0.5% rate hike in December, but a higher terminal rate at some point next year and a greater risk to the economic outlook. Bloomberg poll shows 100% of economists expect some sort of recession next year whether it is a mild or a severe one.

Geopolitical uncertainty tied to ongoing fighting in Ukraine lifted prices earlier this week after reports emerged suggesting Russian oil flows through Druzhba pipeline were halted due to an unidentified "technical reason." The Druzhba pipeline network is a key conduit that delivers Russian oil to landlocked countries in Central and Eastern Europe.

The disruption coincided with a large explosion in eastern Poland near the Ukrainian border that raised widespread alarm among members of the North Atlantic Treaty Organization of a possible expansion of the war in Ukraine. However, Wednesday morning Polish President Andrzej Duda said there was no evidence suggesting the missile that hit a Polish border town with Ukraine was an intentional attack by Russia.

Further risk premium was reduced after Hungary and Slovakia confirmed on Wednesday that the oil flows through Druzhba pipeline successfully resumed after a brief power cut on the Ukrainian side.

In financial markets, the U.S. Dollar Index slipped 0.2% against a basket of foreign currencies to trade near 106.560 as investors continued to reprice risk of recession next year. NYMEX December West Texas Intermediate futures is down more than $1.50 near $80 bbl, and January Brent futures on ICE declined a $1.60 to near $88.15 bbl. December RBOB futures on NYMEX were down more than $0.01 to $2.4425 gallon, with December ULSD futures $0.022 lower at $3.5028 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com